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TBM Consulting Group, Inc. v. Lubbock National Bank

United States District Court, E.D. North Carolina, Western Division

May 31, 2018

TBM CONSULTING GROUP, INC., BILL REMY, MICHELE BENNETT, DAN SULLIVAN, and KEN KOENEMANN, Plaintiffs,
v.
LUBBOCK NATIONAL BANK, Defendant.

          ORDER

          LOUISE W. FLANAGAN UNITED STATES DISTRICT JUDGE

         This matter is before the court on defendant's motion to dismiss (DE 17) pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). The motion has been fully briefed, and in this posture the issues presented are ripe for ruling. For the reasons noted, the motion is granted in part and denied in part.

         STATEMENT OF THE CASE

         Plaintiffs filed this action on September 11, 2017, under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq., seeking relief for defendant's alleged violations of provisions of Title I of ERISA and for breaches of fiduciary duty incurred in connection with defendant's role as trustee of an ERISA plan established by plaintiff TBM Consulting Group, Inc. (“TBM”) for the benefit of TBM employees, including plaintiffs Bill Remy, Michele Bennett, Dan Sullivan, and Ken Koenemann (“individual plaintiffs”) (collectively, “plaintiffs”).[1] Individual plaintiffs assert two claims: disloyalty, imprudence, failure to comply with plan documents in violation of ERISA §§ 404(a)(1)(A), (B), and (D) and violations of ERISA §§ 406(a)(1)(A) and (D) for prohibited transactions. Plaintiff TBM additionally asserts a state-law claim of negligent misrepresentation against defendant.

         In lieu of answer, defendant filed the instant motion to dismiss on November 17, 2017, arguing that 1) plaintiffs lack statutory standing to pursue their ERISA-based claims and 2) plaintiff TBM's negligent-misrepresentation claim is preempted by ERISA. In support of defendant's motion to dismiss, defendant relies upon 1) the plan document at issue, the “TBM Consulting Group, Inc. Employee Stock Ownership Plan” (the “Plan”) 2) the Plan's IRS Form 5500 filings, and 3) complaint from Perez v. Cactus Feeders, Inc., No. 2:16-CV-49 (N.D. Tex.), a case in which defendant was involved. On December 22, 2017, plaintiffs filed opposition, to which defendant filed reply on January 19, 2018. In support of defendant's reply, defendant relies upon the TBM Consulting Group, Inc. Stock Purchase Agreement (the “SPA”).

         On November 20, 2017, the court stayed scheduling activities pending resolution of defendant's instant motion.

         STATEMENT OF THE FACTS

         The relevant facts alleged in the complaint may be summarized as follows. Founded in 1991, TBM is a management consulting firm headquartered in Morrisville, North Carolina, providing consulting services on a worldwide basis. In or around 2003, TBM established the Plan, an employee stock ownership plan entitled the “TBM Consulting Group, Inc. Employee Stock Ownership Plan.” The Plan is a pension plan within the meaning of ERISA § 3(2), 29 U.S.C. § 1002(2). The Plan was created so that participants could obtain an ownership interest in TBM.

         In or around 2011, Anand Sharma (“Sharma”), who was then TBM's president and chief executive officer, sought to sell most of the 77, 799.07 shares of TBM Series B common stock that he owned either personally or through two entities he managed and/or controlled, representing approximately 25.1 percent of TBM's outstanding shares. Sharma ultimately sought to sell approximately 80 percent of his shares (“Swarma shares”) with the Plan serving as the buyer (the “Plan transaction”).

         From 2007 until in or about August 2011, North Star Trust Company (“North Star Trust”) served as the trustee for the Plan. In July 2011, approximately two months before the Plan's purchase of the Sharma shares, Sharma recommended to the TBM board of directors that it replace North Star Trust as Plan trustee with defendant, which the board accepted. Defendant had a close relationship with the attorney advising plaintiff TBM and Sharma with respect to the Plan transaction and was otherwise unknown to the TBM's board prior to Sharma's recommendation. Defendant's appointment as trustee of the Plan became effective on or about August 12, 2011, 30 days before the Plan transaction closed on September 12, 2011.

         As trustee of the Plan, defendant exercised discretionary authority and control over management and disposition of the Plan's assets. In connection with the Plan transaction, defendant retained Stout Risius Ross, Inc. (“SRR”) to act as its independent financial advisor. SRR had previously provided valuation services to North Star Trust prior to defendant's retention. SRR was to prepare a valuation of TBM for the Plan transaction, and a fairness opinion concerning, among other things, the proper consideration to be paid by the Plan for the Sharma shares.

         Plaintiffs allege the SRR report relied heavily on financial projections for the ensuing four years, from 2011 through 2015, which, influenced by Sharma, reflected substantial future increases in the business of TBM. These forecast increases over this period were inconsistent with the trajectory of TBM's actual financial performance, as audited, for the years 2006 to 2010, and with the internally prepared financial statements of TBM for the first seven months of 2011. Additionally, the annual forward-looking valuations prepared by SRR on behalf of the Plan trustee from 2007 through 2010 also relied heavily on future financial projections prepared, or heavily influenced, by Sharma. These projections were never subsequently achieved and were well in excess of actual TBM performance.

         Defendant closed the Plan transaction on September 12, 2011, within one month of its appointment. On that date, defendant, Sharma, and plaintiff TBM entered into the SPA. Pursuant to the SPA, Sharma sold to defendant, as trustee, 62, 239.26 shares of TBM Series B common stock for $10, 500, 000.00 in cash, payable at closing, an amount which plaintiffs allege “was unsupportable in light of the company's history and the unreliability of the Sharma-influenced projections.” (Compl. (DE 1) ¶ 45).

         The Plan transaction consisted of 1) a loan to plaintiff TBM from a third-party bank, 2) a $10, 500, 000.00 loan from TBM to the Plan, 3) the Plan's purchase of the Swarma shares using the $10, 500, 000.00 loan from TBM to the Plan, and 4) the pledging of those shares to TBM as collateral for the loan.

         Individual plaintiffs also allege that they “seek relief . . . on behalf of the [Plan] as a whole and are appropriate representatives thereof, seeking no personal benefit from this action beyond the damages sustained” as a result of defendant's alleged breach. (Id. ¶ 9).

         COURT'S DISCUSSION

         Defendant moves to dismiss plaintiffs' two ERISA-based claims for lack of subject matter jurisdiction, alleging in what appears to be a facial challenge that 1) individual plaintiffs “lack standing to pursue their ERISA-based claims because they have employed no procedural safeguards to ensure they adequately represent the interests of the absent Plan participants, ” and, in what appears to be a factual challenge, that 2) “there are no procedural safeguards that would be sufficient to allow plaintiffs to proceed with their ERISA claims” because plaintiffs appear to be “singularly inadequate representatives of the plan as a whole.” (DE 19 at 6-15). Additionally, defendant moves to dismiss plaintiff TBM's negligent-misrepresentation claim for failure to state a claim upon which relief can be granted, arguing ERISA preempts this claim.

         The court will first address the appropriate standard of review and then address each of defendant's arguments in turn below. A. Standard of Review A Rule 12(b)(1) motion challenges the court's subject matter jurisdiction, and the petitioner bears the burden of showing that federal jurisdiction is appropriate when challenged by the respondent. McNutt v. Gen. Motors Acceptance Corp., 298 U.S. 178, 189 (1936); Adams v. Bain, 697 F.2d 1213, 1219 (4th Cir. 1982). Such a motion may either 1) assert the complaint fails to state facts upon which subject matter jurisdiction may be based, or 2) attack the factual basis for subject matter jurisdiction, apart from the complaint. Bain, 697 F.2d at 1219. Under the former assertion, the moving party contends that the complaint “simply fails to allege facts upon which subject matter jurisdiction can be based.” Id. In that case, “the [petitioner], in effect, is afforded the same procedural protection as he would receive under a Rule 12(b)(6) consideration.” Id. “[T]he facts alleged in the complaint are taken as true, and the motion must be denied if the complaint alleges sufficient facts to invoke subject matter jurisdiction.” Kerns v. United States, 585 F.3d 187, 192 (4th Cir. 2009). When the respondent challenges the factual predicate of subject matter jurisdiction, a court “is to regard the pleadings' allegations as mere evidence on the issue, and may consider evidence outside the pleadings without converting the proceeding to one for summary judgment.” Richmond, Fredericksburg & Potomac R. Co. v. United States, 945 F.2d 765, 768 (4th Cir. 1991). The nonmoving party “must set forth specific facts beyond the pleadings to show that a genuine issue of material fact exists.” Id.

         “To survive a motion to dismiss” under Rule 12(b)(6), “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “Factual allegations must be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555. In evaluating whether a claim is stated, “[the] court accepts all well-pled facts as true and construes these facts in the light most favorable to the plaintiff, ” but does not consider “legal conclusions, elements of a cause of action, . . . bare assertions devoid of further factual enhancement[, ] . . . unwarranted inferences, unreasonable conclusions, or arguments.” Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc., 591 F.3d 250, 255 (4th Cir. 2009) (citations omitted).

         Defendant argues that its challenge to plaintiffs' statutory standing is brought properly pursuant to Rule 12(b)(1). However, a challenge to statutory, not constitutional, standing is properly considered under Rule 12(b)(6). See David v. Alphin, 704 F.3d 327, 333 (4th Cir. 2013) (noting distinction between statutory standing and Article III standing to bring ERISA claims); CGM, LLC v. BellSouth Telecommunications, Inc., 664 F.3d 46, 52 (4th Cir. 2011) (“Nevertheless, the district court correctly focused on Civil Procedure Rule 12(b)(6) because the standing inquiry at the heart of this case is statutory standing-a concept distinct from Article III and prudential standing. And typically, [a] dismissal for lack of statutory standing is effectively the same as a dismissal for failure to state a claim.”) (citations omitted)); United States v. Oregon, 671 F.3d 484, 490 (4th Cir. 2012) (“We note that the ‘standing' at issue in this case is statutory standing, which is a separate inquiry from Article III standing. Statutory standing is itself a merits issue.”) (citations omitted)); see also DB Healthcare, LLC v. Blue Cross Blue Shield of Arizona, Inc., 852 F.3d 868, 873 (9th Cir. 2017) (“[A] dismissal for lack of statutory standing [under ERISA] is properly viewed as a dismissal for failure to state a claim rather than a dismissal for lack of subject matter jurisdiction.”); AvuTox, LLC v. Cigna Health & Life Ins. Co., No. 5:17-CV-250-BO, 2017 WL 6062257, at *3 (E.D. N.C. Dec. 7, 2017) (“A challenge to a plaintiff's derivative standing to sue under ERISA is considered under Rule 12(b)(6).”).[2]

         Thus, the court considers defendant's motion to dismiss as one brought pursuant solely to Rule 12(b)(6). See, e.g., Hawes v. Network Solutions, Inc., 337 F.3d 377, 383 (4th Cir.2003) (explaining that a district court should consider a motion to dismiss improperly filed under Rule 12(b)(1), when predicated on non-jurisdictional grounds, as a motion under 12(b)(6)).

         A court may not consider matters outside the pleadings without converting a Rule 12(b)(6) motion to a motion for summary judgment. Fed.R.Civ.P. 12(d). However, documents attached to the complaint and those incorporated in it by reference are deemed part of the pleadings and therefore may be considered without converting a Rule 12(b)(6) motion. See Pueschel v. United States, 369 F.3d 345, 353 n. 3 (4th Cir.2004); Am. Chiropractic Ass'n v. Trigon Healthcare, Inc., 367 F.3d 212, 234 (4th Cir.2004); see also Philips v. Pitt Cty. Mem'l Hosp., 572 F.3d 176, 180 (4th Cir.2009).

         Here, the Plan document and SPA are clearly referenced throughout the complaint, (see, e.g., Compl. (DE 1) ¶¶ 12-14, 41-42), and the authenticity of the documents is not disputed. Thus, the court will consider these documents.[3]

         B. Statutory Standing

         ERISA § 502(a)(2) provides that “[a] civil action may be brought-by the Secretary [of Labor], or by a [plan] participant, beneficiary or fiduciary for appropriate relief under section 1109 of this ...


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